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Unemployment has become a lot like the weather. Everyone talks
about it but no one really does anything about it.

One group of heterodox economists would
like to change that. The Modern Monetary
Theory school of economists would
like to see the government act as an employment backstop. When
people cannot find employment elsewhere, they would be able to
turn to the government for a job.

The federal government, in other words,
would act on employment much like the Federal Reserve does for
bank liquidity. It would be the employer of last resort.

The MMT crowd tends to call this the
"Jobs Guarantee." It's a good slogan. And after years of
persistent unemployment, I bet a lot of Americans might think it
is not too bad of an idea.

Regular readers will have noticed that
I've been writing a lot about MMT recently. I was introduced to
MMT by Cullen Roche at the blog Pragmatic
Capitalism after someone mentioned
that my writings on the debt ceiling sounded a lot
like MMT.

I had been explaining that the
federal government could never run out of
money, even if it refused to
borrow because it had hit the debt ceiling. A government that
pays for things with currency it creates can always just create
more currency, regardless of what the bond markets say. What I
hadn't realized until I was directed to the MMT crowd was that an
entire school of economics had been built around this core
insight.

But the MMTers do not limit themselves to explaining that the
government is not revenue constrained. Many of them also
subscribe to the idea that the government should guarantee
everyone a job. In fact, one of the key proponents of MMT
recently argued that the Jobs Guarantee is a "central aspect" of
the school.

If this were true, it would mean that
MMT is wrong. Fortunately, I don't think it is true. It's
entirely possible to do MMT without the jobs guarantee. In fact,
it's necessary because the Jobs Guarantee is unworkable.

There are at least three reasons the
Jobs Guarantee cannot work.

1. It's massively
inflationary. Australian economist and MMT
proponent Bill Mitchell
insists that no inflationary pressure arises from having the
government buy labor that no one else wants. But he's just wrong.

While employing the unemployed may not
create upward pressure on wages, it dramatically increases
demand. The national income is increased by the amount the
government pays those laboring in JG jobs.

That income is entirely from newly
created money, so the money supply is expanding.

That additional demand is not matched by
additional supply, however.

The people working in JG jobs are not
producing goods that the market needs. Their work product is
largely waste. Which means that demand increases without the
supply of desired goods increasing. The result: inflation.

2. It's a bureaucratic
nightmare. There are currently over 13.5
million people unemployed in the United States. Creating
worthwhile jobs for every single one of them is impossible. Even
if we had 13.5 million shovel ready jobs today, we would very
quickly run out of them next year or the year after that.

There are 13.5MM people unemployed today. The Federal govt
employs 2MM people currently. WalMart employs 1.8MM people
today and is the largest pvt sector employer. You’re not simply
talking about a public works program. You’re talking about
swallowing Wal-Mart by more than FIVE FOLD. A JG would
involve the largest govt program ever instituted in the history
of the world.

The JG is a creature of happier times
and smaller economies. Bill Mitchell explains that he thought up
the idea while he was a student at the University of Melbourne.
The total employed population of
Australia is only about 11.5
milllion. Australia currently has an unemployment rate of around
5.3 percent, which translates into 635,800 jobless people. In
other words, a jobs guarantee in Australia might be workable. But
it doesn't scale to fit the United States.

3. It's economically
stagnating. Economic booms are often
characterized by malinvestment--people dedicating capital to
projects that turn out not to be economically sustainable. This
is true not just of financial capital—it is true of human capital
as well. People learn trades and develop career networks that
turn out to be worth far less than they expected.

Unemployment encourages those who went
into trades that turn out to lack adequate demand to give up
those trades and seek another. This is economically productive
because it brings stagnate resources—people who can do things no
one will pay for—out of stagnation.

The Jobs Guarantee would eliminate this
process. The government would buy the labor of people who hold
skills not demanded by the market, preventing those people from
seeking out new skills. Stagnant human capital would just
continue to stagnate.

In short, the Jobs Guarantee is a nice
sounding project that might work out well on paper. But it
doesn't work in the real world.